Refinance a Car Loan with Bad Credit | Loans

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OK, your credit stinks.

However, you want a new car. So you go to the local car dealership and believe the salesman when he says...

"Buy this car today at this high interest rate and we'll refinance you in 12 months at the lowest interest rate possible."

Everyday car dealers repeat the "refinance in 12 months" lie to people with bad credit to push them to buy new automobiles at ridiculously high interest rates.

You may have financed an automobile through a high-interest subprime lender knowing that it's a bad idea. But you might have thought it was your only option at the time and you justified it by telling yourself you could refinance to a lower interest rate down the road.

Unfortunately, when you try to refinance the car later on, you find out the salesman lied to you.

Best Way for People with Bad Credit to Refinance

The first thing you need to find out is whether or not you even qualify to refinance, or if you should just sell or trade-in your car. Begin with how much your car is worth.

The biggest error most people make when establishing the actual value of their car is they base their research on the private party value. You need the trade-in or dealer retail value instead.

Here's how to get the value of your car...
Step #1: Go to www.edmunds.com. In my opinion Edmunds the best automobile site on the web.
Step #2: When you get on the front page, click on "What's your car worth?" It's written in small type and kind of hard to find, but it'll be somewhere on the main page. Or you can go straight to the Used Car Appraiser.
Step #3: Follow the steps and click on the make, model and year of your car.
Step #4: Fill in the vehicle details and any optional equipment your car has.

You'll see three distinct values for your car: Trade-In, Private Party and Dealer Retail. The two values you need to focus on are Trade-In and Dealer Retail.

Some lenders base their refinancing on the trade-in value and others on the retail value. Try to find a lender that uses the retail value, as it's always higher.

Get Your Loan Payoff from the Finance Company

Loan payoff is what you still owe on your automobile.

Find out what the remaining balance on your car is. If you're leasing the car, make sure to include the total remaining payments, residual amount and any early termination fees the bank requires so you get the true payoff amount.

Now subtract the value of your car from the payoff amount.

Do you owe less than the car is worth? If so, you have more selections and alternatives. If you owe more on your automobile than it's worth (known as being "upside down") you need to be a little more flexible.

Let’s Start Calling Finance Companies

Credit unions and banks are the premier options for refinancing your car. Auto manufacturers rarely refinance-possibly for luxury cars. Remember to check if the lender you use reports to all three credit bureaus.

The four big questions to ask each lender are:

1. "Do you refinance based on the trade-in or dealer retail value of the car?"
2. "What percent over the trade-in/retail value will you lend?"
3. "Which credit bureau do you use?"
4. "What FICO score is needed to be approved for refinancing?"

Remember that lenders who refinance usually will put up no more than 125% of the trade-in or retail value. The average amount is only 110%. So, if you are upside down on more than 10% of the value of your car, you have to pony up the difference prior to the lender giving you a loan.

If you need to calculate how much is needed to borrow to refinance, download the free Auto Refinance Worksheet and it will walk you through the steps to find out.

If you happen to not be in a position to refinance currently, there is another alternative-trade in your current automobile for another one with a manufacturer's rebate.

Make Use of Manufacturer Rebates

A lot of auto manufacturers offer massive rebates to sell automobiles fast. There are gigantic incentives for a dealer to sell a new car.

You have to locate the highest rebate offer you can find and work toward trading-in your car to eradicate any upside down condition.

Prior to going to a new car dealer, check out www.edmunds.com and look up the rebate and interest rate on every new car and truck a manufacturer offers. This way, if the car salesman isn't being honest with you (in relation to rebates and interest rate) you will know it.

Just go to www.edmunds.com, then click on "New Cars," then on "Incentives & Rebates." You will have all the information you need.

It's a bad situation when you’re upside down on a high-interest car loan that you want to refinance. However, you can get around it by purchasing a new car with a large rebate. You just use the rebate to offset the amount you owe on your old car.

If you come across a car with a higher rebate (highly recommended), you're in an even better situation. If the rebate is high enough, it can wipe out the negative equity and you can use any remaining amount as the down payment.

The Secret Question to Ask the Salesperson

If you want to get a really amazing deal, try asking the salesperson this question:

"What car or truck on your lot do you need to sell immediately?"

If you’re upside down, you need every advantage possible. Ask the dealership to sell you the oldest car in their inventory.

Some dealerships are willing to take a loss on cars they're having difficulty selling because it costs more to keep them on the lot, as compared to selling them faster and taking a loss.

This could add up to an additional $500 to $3,000 in savings!

Credit Score Needed to Be Eligible for Refinancing

Just like all other major purchases made on credit, we have to meet a minimum FICO score to be eligible for a loan. This is especially true if the lender is a bank or credit union.

For example, on new cars one manufacturer requires a FICO score of:
680 and above to get a 125% loan
650 to 679 to get a 115% loan
620 to 649 to get a 110% loan
620 or less only gets you a 100% loan

Any loan over 100% will go toward paying off the balance of your existing car loan.

End result: the better your FICO scores-the more alternatives you have and better terms you will receive. This is the reason to increase your credit scores (to improve your lifestyle!).

Not all three of your FICO scores need to be high...just the one the lender uses.

Each lender will have a minimum FICO score requirement. Ask them what it is and from which credit reporting agency you need it.

Now here's where it can get confusing. Some finance companies will use a traditional FICO credit score to make a lending decision...and other lenders may use the FICO Auto Industry Option score.

It's your task to find out which score they use. If they don’t give you an answer your comfortable with...find one that does.

When you know what FICO score they look at, you're putting yourself in the best situation to be approved for refinancing.

If you've paid past auto loans on time, your FICO Auto Industry Option scores should be much higher than the standard FICO scores. In that case, you should use a lender that uses your Auto Industry scores. In the best situation, the finance company you choose will have access to both sets of scores and will use the higher one.

Many (not every) finance companies will require minimum score of 650 from the credit bureau they use to make a loan decision to refinance. But the only way to know each individual lender's policy is to ask.

About the Author

Dana Facemyer is an attorney for the law firm Facemyer & Associates. Dana specializes in disputing the accuracy of your credit reports which can result in improved credit scores.

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